lesson 11 Flashcards
what is cross elasticity of demand?
measures the responsiveness of demand for one product to changes in price of another good
cross elasticity of demand equation
% change in quantity of (A) / % change in price of (B)
what type of numerical values can XED have?
positive, negative or zero which indicated an increase, decrease or no change in demand.
three possible relationships of cross elasticity of demand
competing demand
joint demand
no relationship
cross elasticity of demand: competing demand
positive XED
rise in the price of one product is likely to cause demand for the substitute to increase
cross elasticity of demand: joint demand
negative XED
rise in the price of one product causes demand for a complementary product to decrease
cross elasticity of demand: no relationship
where we have zero cross elasticity
significance of XED
- if your product has a high positive XED then it may be an incentive to cut prices and attract customers
- closer the products relationship the more elastic the response
- warns firms that raising princes would lead to lost customers
- low positive XED gives firms more power to raise prices but less opportunity to benefit from cutting prices
if operating in a competitive market what is the XED going to be like?
positive so rising prices will cause demand for substitutes to rise
how has the internet effected XED?
it has effected the competitiveness of markets as consumers can easily check prices across a range of companies and choose the price that suites them which reduces firms ability to raise prices above their competition
XED of complementary goods is…
negative
XED of substitute goods is…
positive
what does inelastic cross elasticity demand tell us?
- raise prices to boost revenues
- necessity
- addictive
- few substitutes
what does elastic demand tell us?
cut prices to gain customers to boost revenue
lots of substitutes
